It is that time of year when all good bears, fat on profits
from the 3Q earnings season, slink off to their dens for a long
winters nap. Amazingly the flood of "Nasdaq 700 is coming" emails
have fallen off in the last several days and those predicting the
demise of the current market have lost few converts. Negative
earnings news as well as misquotes from Cisco CEO John Chambers
were not able to stop the huge Tuesday gains.

This was the day that Monday should have been! The markets had
been setting up for a surprise farewell party for the bears but
the American Airlines crash on Monday allowed them one last fling.
The dip on fears that terrorists had caused the crash took the
Dow all the way back to strong support at 9400 but the rebound
was very quick. Without the crash drag on Dow components UTX and
GE it probably would have made it back to positive territory.
There was a pause just above support at 9525 while bulls held their
breath but the news that Kabul had been abandoned and the crash was
likely mechanical was all they needed.

Labeled the "Kabul rally" the markets gained strength and shook off
bad news to power ahead. The concept that the Taliban may have
given up the country's capital city without a fight and was heading
to more remote areas to avoid being pounded into dust by the coalition
was welcome news. The fierce 40,000 Taliban fighting force was AWOL
and it now appears that the noose is tightening around Al Queda.
This news sparked buying by those who felt that the war was under
control and we would slowly grind down the opposition until they
were gone.

The news from New York that the American Airlines flight was in
trouble almost from the second the wheels left the ground also
brought a concealed sigh of relief from investors. Nobody is
ever glad when over 260 people die but the relief was that it was
not a terrorist event. The longer we go without a significant
terrorist event on our soil, the more investors will forget that
the threat exists.

The real news that the market ignored was massive earnings misses,
earnings warnings and misquoted CEO statements. Any of which could
have cratered the averages just several weeks ago. The first event
was a giant earnings miss from Watson Pharmaceutical, (WPI) which
announced earnings of $.32 when analysts were expecting $.65. The
company cited stiff pricing pressure which was increasing in the
generic drug market and a redirection of their efforts. OOPS!
Investors don't like surprises and WPI lost -$18.61 to $28.54.
This produced a drag on other drug stocks but did not slow the
markets.

Oracle CEO, Larry Ellison, warned that ORCL would miss analyst's
estimates of $.11 by a penny or two. Ellison blamed a tough
environment since 9/11 and said sales would fall on a year over
year basis for the first time in ten years. They expect licensing
revenue to fall -20% compared to the same quarter last year.
ORCL fell -$.88 to $14.51 but normally a warning like this would
have knocked several dollars off the stock. This shows that the
investor has factored in the impact of 9/11 and is willing to
overlook some weakness going forward.

Cisco CEO, John Chambers, was misquoted around 1:PM and CSCO
stock lost about -.75 from its intraday highs. He was quoted
as saying that he expected another 2-8 quarters of weakness
ahead which would have been a change in forecast for him and
Cisco. What he actually said was "some economists are forecasting
another 2-8 quarters of weakness for the economy, but we really
don't know". He said sales were increasing slightly after having
plateaued after the first post attack gains. CSCO recovered to
close up +.32 for the day after the comments were explained.

The biggest point here is that there were three separate and
major news events and none of them tanked the markets. The trend
from last week continued. As I mentioned in the Sunday newsletter
the materials stocks continued to climb with stocks like Alcoa
having banner days. Even MMM tacked on another +2.46 and remember
they said this was the worst year in 30 years. Bullishness is
breaking out all over.

The retail sales numbers are coming in stronger than expected
as most retailers report this week and according to many analysts
this means the bottom is behind us. They are now looking for a
better holiday season and the good war news is like icing on the
cake. Homebuilder stocks (BZH, CTX, PHM) and home materials supply
stocks (HD, LOW) are soaring again as cheap interest rates filter
down to the buying public. The October Retail Sales report will
be announced at 8:30 on Wednesday.

The rally was not concentrated in just a few sectors. The Networking
sector was up +5%, Semiconductors +4.25%, Computer Hardware +4% and
so on. Volume was good on the NYSE and Nasdaq and the internals
were strongly positive at 2:1 for advancers over decliners. The
broader S&P-500 has broken out of its May-Nov decline and is now
well above resistance at 1100 which worries the bears. The bullish
percent on the S&P-500 was only 55% on Monday which indicates that
we could have some more bullish days ahead of us.

We are still in a recession and nobody is claiming a magic rebound
on that as of yet. This means that earnings will not reflect the
optimism of investors for at least a couple quarters. Still this
is not an insurmountable problem. The markets have shown a
remarkable ability to climb the current mountain of worry as I
discussed last week. The bears have tried to put as many obstacles
in our path as possible but they were unable to even hold the
indexes down below the closest support level at 9525 on Monday much
less 9400. Fighting the tape has become a losing proposition for
shorts and we are very close to some real breakout possibilities.

The Dow has no real resistance between here and 10,000. Once the
Nasdaq clears 1925 it appears almost a given that 2000 will only
be a couple days away. The S&P closed over resistance at 1133 and
the next major barrier is not until 1185. In short, there appears
to be little if no resistance for the next several days and that
is really scary. Without a sequence of obstacles, steps to a goal
as an example, can the markets survive in this rarified atmosphere?
The volatility in the markets is dropping like a rock as everyone
lines up on the same side of the debate.

I think the washout at the open on Monday took all the weak holders
and stop losses in this area and flushed them. The quickness of
the rebound showed we are not oversold and there is money waiting
on the sidelines. However, as with any major gain, +196, there
will be those who will want to take profits soon. The trend is
definitely up but it will not be in a straight line. There are
many traders just waiting for their stocks to get back to the
price they paid last summer to sell and get out whole. There
are several high profile earnings reports on Wednesday including
AMAT, HWP, FD and LIZ. They will help portray the health of the
tech sector and the retail sector.

We need to practice caution as we move forward and be ready for
that next dip. Nothing should be taken for granted. Rejoice for
every positive day we get but keep raising your stops to prevent
giving it all back. The closer we get to 10,000/1925 the more
likely the next round of profit taking becomes. As I have been
telling you for the last three weeks, buy the dips. That still
stands until we touch those levels above but then we need to
be even more cautious and re-evaluate the tactic.